A month ago I wrote “What is the VIX Suggesting about Investor Complacency and Future Volatility?” suggesting that options traders are paying low premiums for options because they are not so fearful of future volatility and lower stock prices. I pointed out that:
We could also say “investors are complacent” since they aren’t expecting future volatility to increase or be higher.
These levels of complacency often precede falling stock markets and then rising volatility. When stock prices fall, volatility spikes up as investors suddenly react to their losses in value
We shouldn’t be surprised to see at least some short-term trend reversals; maybe stocks trend down and the VIX® trends up…
A month later, the VIX® has gained 50% and 40% in a single day yesterday as the S&P 500 dropped -2.4%.
Ten days ago I also wrote “September Worst Month for Stocks?” pointing out the historic expected return for U.S. stocks in the month of September. I showed a chart that illustrates the mathematical expectation for the expected return for each month based on the past 66 years. Since 1950, the month of September has historically been the worst month for stocks.
You can probably see how the weight of the evidence of multiple factors paints a picture of the current market state. We could add that this is a very, very, aged and overvalued bull market. The normalized P/E is 26.7—well above the level justified by low inflation and interest rates. The current status remains “significantly overvalued.”
Investors should actively manage their downside risk and prepare for continued swings in market trends.
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